BBA110 CU - Sem 2 -Bcom-BBA- Advance Accounting-converted

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER-II ADVANCE ACCOUNTING BBA110

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY 3 Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2020 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the even the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 4 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit-1 Balance Sheet.............................................................................................................................5 Unit-2 Profit & Loss Account ............................................................................................................31 Unit-3 Financial Statements ..............................................................................................................45 Unit-4 Banking Accounts I.................................................................................................................83 Unit-5 Banking Account II...............................................................................................................128 Unit-6 Banking Accounts III............................................................................................................172 Unit-7 Consignment Account I........................................................................................................182 Unit -8 Consignment Account III....................................................................................................189 Unit-9 Consignment Account III.....................................................................................................214 Unit-10 Consignment Account IV...................................................................................................226 Unit-11 Departmental Accounting ..................................................................................................242 Unit-12 Departmental Accounting ..................................................................................................250 Unit-13 Voyage Accounting .............................................................................................................272 Unit-14 Royalty Accounting ............................................................................................................293 Unit-15 Royalty Accounting ............................................................................................................301 5 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-1 BALANCE SHEET Structure Learning Objective Introduction Preparation of Balance Sheet as per Schedule III of Companies Act, 2013 Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • Interpret balance sheet • State format of balance sheet as per schedule III • Describe the guidelines to prepare balance sheet INTRODUCTION A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity. The balance sheet is one of the three (income statement and statement of cash flows being the other two) core financial statements used to evaluate a business. PREPARATION OF BALANCE SHEET AS PER SCHEDULE III OF COMPANIES ACT, 2013. 1. Section 129 of companies act 2013, provides for preparation of financial statements. 2. 2(40) to include balance sheet, profit and loss account/income and expenditure account, cash flow statement, statement of changes in equity and any explanatory note annexed to the above. 3. New section 129 corresponds to existing section 210. It provides that the financial statements shall give a true and fair view of the state of affairs of the company and shall comply with the accounting standards notified under new section 133. 4. It is also provided that the financial statements shall be prepared in the form provided in new schedule III of Companies Act, 2013. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

5. It may be noted that in the new schedule III the provisions for preparation of balance sheet and statement of profit and loss have been given which are on the same lines as in the existing schedule VI. 6. Further, in the new Schedule III detailed instructions have been given for preparation of consolidated financial statements as consolidation of accounts of subsidiary companies is now made mandatory in section 129. 7. It may be noted that for the first time a provision has been made in the new section 129(3)that if a company has one or more subsidiaries it will have to prepare a consolidated financial statement of the company and of all the subsidiaries in the form provided in the new schedule III of Companies Act, 2013. 8. The company has also to attack along with its financial statement, a separate statement containing the salient features of the financials of the subsidiary companies in such form as may prescribed by the rules. 9. It is also provided that if the company has interest in any associate company or a joint venture the accounts of that company as well as joint venture shall be consolidated. 10. For this purpose associate company has been definedinnewsection2(6) company has significant influence i.e., it has. 20% of the total share capital of the company or has control on the business decision under an agreement. 11. The Central Government has power to exempt any companies from complying with any of the requirements made under the section. Schedule III (See section 129) GENERAL INSTRUCTION FOR PREPARATION OF BALANCE SHEET AND STATEMENT OF PROFIT AND LOSS OF A COMPANY GENERAL (1) Where compliance with the requirements of the Act INSTRUCTIONS including Accounting Standards as applicable to the companies require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head or sub-head or any changes, in the financial statements or statements forming part thereof, the same shall be made and the requirements of this Schedule shall stand modified accordingly.(2) The disclosure requirements specified in this Schedule are in addition to and not in substitution of the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act, 2013. Additional disclosures specified in the Accounting Standards shall be made in the notes to 7 CU IDOL SELF LEARNING MATERIAL (SLM)

accounts or by way of additional statement unless required to be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in this Schedule. (3) (i) Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required a) narrative descriptions or disaggregation’s of items recognised in those statements; and b) Information about items that do not qualify for recognition in those statements. (ii) Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes to accounts. In preparing the Financial Statements including the notes to accounts, a balance shall be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation (4) (i) Depending upon the turnover of the company, the figures appearing in the Financial Statements maybe rounded off as given below:— Turnover Rounding off (a) less than one hundred’ crore To the nearest hundreds, rupees thousands, lakhs, millions, or decimals thereof (b) one hundred crore rupees or To the nearest lakhs, millions more or crores, or decimals thereof. (ii) Once a unit of measurement is used, it shall be used uniformly in 8 the Financial Statements.(5) Except in the case of the first Financial CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Statements laid before the Company (after its incorporation) the Standards. corresponding amounts (comparatives) for the immediately preceding reporting period for all items shown in the Financial Statements including notes shall also be given. (6) For the purpose of this Schedule, the terms used herein shall be as per the applicable Note: —this part of Schedule sets out the minimum requirements for on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as —Financial Statements || for the purpose of this Schedule) and Notes. Line items, sub-line items and sub-totals shall be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant to an understanding of the company’s financial position or performance or to cater to industry/sector-specific disclosure requirements or when required for compliance with the amendments to the Companies Act or under the Accounting Standards. PART I-BALANCE SHEET Name of the Company……………………. Balance Sheet as at……………………… Particulars Note No. Figures as at Figures as at the the end of end of previous current reporting period reporting period I. EQUITY AND LIABILITIES 1) Shareholder’s Funds(a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants 9 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) Share application money pending 10 allotment (3) Non-Current Liabilities(a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other Long term liabilities (d) Long term provisions (4) Current Liabilities(a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions Total II.Assets (1) Non-current assets(a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets CU IDOL SELF LEARNING MATERIAL (SLM)

(2) Current assets(a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets Total GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET PARTICULARS 1. When an asset If it satisfies any of the (a) it is expected to be realised, or shall be classified given criteria is intended for sale or consumption, as current? in the company’s normal operating cycle; or(b) it is held primarily for the purpose of being traded; or (c) it is expected to be realised within twelve months after the reporting date; or (d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date. 2. When an asset Asset other than Current Asset shall be classified shall be classified as non-current as Non-Current? Operating Cycle Time between the Where the normal operating cycle acquisition of assets for cannot be identified: It is assumed 11 CU IDOL SELF LEARNING MATERIAL (SLM)

processing And to have a duration of 12 months Their realisation in cash or cash equivalents When liability If it satisfies any of the (a) It is expected to be settled in the shall be classified given criteria company normal operating cycle; as current? or(b) It is held primarily for the purpose of being traded; or (c) It is due to be settled within twelve months after the reporting date; or (d) The company does not have an unconditional right to defer settlement of the liability for least twelve months after the reporting cm Terms of a liability that could, at the option the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. When a liability liability other than Current liability shall be classified shall be classified as Non-Current. as Non-Current? When receivable If it is in respect of the In The Normal Course Of Business amount due on account of shall be classified goods sold or services as a “trade rendered receivable”? When payable If it is in respect of the In The Normal Course Of Business amount due on account of shall be classified goods purchased or as a “trade services received payable”? 12 CU IDOL SELF LEARNING MATERIAL (SLM)

– 1 Share Capital For each Class of a. The number and number of shares Share authorized. The number of shares issued, Capital(Different subscribed and fully paid, and subscribed but classes of not fully paid. preference shares c. Par value per share. to be treated separately) d. A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period. e. The rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital. f. Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate. g. Shares in the company held by each shareholder holding more than 5 per cent, shares specifying the number of shares held. h. Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts. i. For the period of five years immediately preceding the date as at which the Balance Sheet is prepared. i. Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s) without payment being received in cash. ii. Aggregate number and class of shares 13 CU IDOL SELF LEARNING MATERIAL (SLM)

allotted as fully paid-up by way of bonus shares. i. Aggregate number and class of shares bought back. j. Terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date. k. Calls unpaid (showing aggregate value of calls unpaid by directors and officers). l. Forfeited shares (amount originally paid-up). 2 Reserves and shall be classified 1) Capital Reserves;2) Capital Redemption Surplus as Reserve; 3) Securities Premium Reserve; 4) Debenture Redemption Reserve; 5) Revaluation Reserve; 6) Share Options Outstanding Account; 7) Other Reserves(specify the nature and purpose of each reserve and the amount in respect thereof); 8) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and appropriations such as dividend, bonus snares and transfer to/from reserves, etc.; (Additions and deductions since last balance sheet to be shown under each of the specified heads); Reserve by earmarked investments shall be termed as specifically a “fund”. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

represented Debit balance of Shall be shown as a negative figure under the statement of head “Surplus”. Similarly, the balance of profit and loss “Reserves and Surplus”, after adjusting negative balance of surplus, if any, shall be shown under the head “Reserves and Surplus” even if the resulting figure is in the negative. 3. Long-Term shall be classified 1) Bonds/debentures;2) Term loans: Borrowings as (i) from banks. (ii) from other parties 3) Deferred payment liabilities; 4) Deposits; 5) Loans and advances from related parties; 6) Long term maturities of finance lease obligations; 7) Other loans and advances (specify nature) shall be further SECURED AND UNSECURED (Nature of sub-classified as security shall be specified separately in each case) Where loans have The aggregate amount of such loans under been guaranteed each head shall be disclosed. by directors or others Bonds/debentures shall be stated in descending order of (along with the maturity or conversion, starting from farthest rate of interest redemption or conversion date, as the case and particulars of may be. Where bonds/debentures are 15 CU IDOL SELF LEARNING MATERIAL (SLM)

redemption or redeemable by instalments, the date of conversion, as the maturity for this purpose must be reckoned as case maybe) the date on which the first instalment becomes due. Particulars of any which the company has power to reissue shall redeemed be disclosed bonds/debentures Shall state Terms of repayment of term loans and other loans Shall specify Period and amount of continuing default as on the balance sheet date in repayment of loans and interest(separately in each case) 4. Other Long- shall be classified (1) Trade payables;(2) Others. term as Liabilities 5. Long-term shall be classified 1) Provision for employee benefits;2) Others provisions as (specify nature). 6. Short-term shall be classified 1) Loans repayable on demand;(i) from borrowings as banks. (ii) from other parties. (iii) Loans and advances from related parties; (iv) Deposits; (v) Other loans and advances (specify nature). Borrowings shall secured and unsecured(Nature of security further be sub- shall be specified separately in each case) classified as 16 CU IDOL SELF LEARNING MATERIAL (SLM)

Where loans have The aggregate amount of such loans under been guaranteed each head shall be disclosed. by directors or others Shall specify Period and amount of continuing default as on the balance sheet date in repayment of loans and interest (separately in each case) 7. Other current shall be classified 1) Current maturities of long-term debt;2) liabilities as Current maturities of finance lease obligations; 3) Interest accrued but not due on borrowings; 4) Interest accrued and due on borrowings; 5) Income received in advance; 6) Unpaid Dividends; 7) Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms and conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed. It shall also be disclosed whether the company has sufficient authorised capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being 17 CU IDOL SELF LEARNING MATERIAL (SLM)

pending shall be disclosed. Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable, i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under “Other current liabilities”; 8) Unpaid matured deposits and interest accrued thereon; 9) Unpaid matured debentures and interest accrued thereon; 10) Other payables (specify nature). 8 Short-term shall be classified 1) Provision for employee benefits2) Others provisions as (specify nature). 9. Tangible Classification 1) Land;2) Buildings; assets shall be given as 3) Plant and Equipment; 4) Furniture and Fixtures; 5) Vehicles; 6) Office equipment; 7) Others (specify nature). Under lease shall under each class of asset be separately specified A reconciliation showing additions, disposals, acquisitions of the gross and through business combinations and other net carrying adjustments and the related depreciation and amounts of each impairment losses/reversals shall be disclosed 18 CU IDOL SELF LEARNING MATERIAL (SLM)

class of assets at separately. the beginning and end of the reporting period Where sums have shall show the reduced or increased figures as been written-off applicable and shall by way of a note also on aneducation of show the amount of the reduction or increase capital or as applicable together with the date thereof revaluation of for the first five years subsequent to the date assets or where of such reduction or increase. sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition 10 Intangible Classification 1) Goodwill;2) Brands /trademarks; assets shall be given as 3) Computer software; 4) Mastheads and publishing titles; 5) Mining rights; 6) Copyrights, and patents and other intellectual property rights, services and operating rights; 7) Recipes, formulae, models, designs and prototypes; 8) Licences and franchise; 9) Others (specify nature). A reconciliation showing additions, disposals, acquisitions 19 CU IDOL SELF LEARNING MATERIAL (SLM)

of the gross and through business combinations and other net carrying adjustments and the related depreciation and amounts of each impairment losses/reversals shall be disclosed class of assets at separately. the beginning and end of the reporting period Where sums have shall show the reduced or increased figures as been written-off applicable and shall by way of a note also on aneducation of show the amount of the reduction or increase capital or as applicable together with the date thereof revaluation of for the first five years subsequent to the date assets or where of such reduction or increase. sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition 11. Non-current shall be classified 1) Investment property;2) Investments in investments as trade Equity Instruments; investments and 3) Investments in preference shares; other investments and further 4) Investments in Government or trust classified as securities; 5) Investments in debentures or bonds; 6) Investments in Mutual Funds; 7) Investments in partnership firms; 8) Other non-current investments (specify nature). Under each classification, details shall be given of names of the bodies 20 CU IDOL SELF LEARNING MATERIAL (SLM)

corporate indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly-paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given. Investments should be separately stated specifying the carried at other basis for valuation thereof; than at cost The following 1) Aggregate amount of quoted investments shall also be and market value thereof;2) Aggregate disclosed amount of unquoted investments; 3) Aggregate provision for diminution in value of investments. 12. Long-term loans and 1) Capital Advances;2) Security Deposits; loans and advances shall be 3) Loans and advances to related parties advances classified as: (giving details thereof); 4) Other loans and advances (specify nature). The above shall 1) Secured, considered good;2) Unsecured, also be separately considered good; 21 CU IDOL SELF LEARNING MATERIAL (SLM)

sub-classified as: 3) Doubtful. Allowance for shall be disclosed under the relevant heads bad and doubtful separately. loans and advances Loans and should be separately stated. advances due by directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies respectively in which any director is a partner or a director or a member 13. Other non- shall be classified 1) Long-term Trade Receivables (including current assets as trade receivables on deferred credit terms);2) Others (specify nature); 3) Long term Trade Receivables, shall be sub-classified as: (i) Secured, considered good;(ii) Unsecured, considered good; (iii) Doubtful 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately. Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. 14. Current shall be classified 1) Investments in Equity Instruments;2) Investments as Investment in Preference Shares; 3) Investments in Government or trust securities: 4) Investments in debentures or bonds; 5) Investments in Mutual Funds; 6) Investments in partnership firms; 7) Other investments (specify nature). Under each details shall be given of names of the bodies classification corporate indicating separately whether such bodies are:(i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

following shall 1) The basis of valuation of individual also be disclosed: investments2) Aggregate amount of quoted investments and market value thereof; 3) Aggregate amount of unquoted investments; 4) Aggregate provision made for diminution in value of investments 15. Inventories Inventories shall 1) Raw materials;2) Work-in-progress; be classified as: 3) Finished goods; 4) Stock-in-trade (in respect of goods acquired for trading); 5) Stores and spares; 6) Loose tools; 7) Others (specify nature) Goods-in-transit shall be disclosed under the relevant sub-head of inventories Mode of shall be stated valuation 16. Trade Shall separately Aggregate amount of Trade Receivables Receivables state shall be sub- outstanding for a period exceeding six classified as months from the date they are due for payment 1) Secured, considered good;2) Unsecured, considered good; 3) Doubtful. Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. 17. Cash and shall be classified 1) Balances with banks;2) Cheques, drafts on cash as hand; equivalents 3) Cash on hand; 4) Others (specify nature) Earmarked shall be separately stated balances with banks (for example, for unpaid dividend) Balances with shall be disclosed separately. banks to the extent held as margin money or security against the borrowings, guarantees, other commitments Repatriation shall be disclosed separately. restrictions, if any, in respect of cash and bank balances Bank deposits shall be disclosed separately. with more than 25 CU IDOL SELF LEARNING MATERIAL (SLM)

twelve months maturity 18. Short-term shall be classified 1) Loans and advances to related parties loans and as: (giving details thereof);2) Others (specify advances nature). above shall also 1) Secured, considered good;2) Unsecured, be sub-classified considered good; as 3) Doubtful. Allowance for shall be disclosed under the relevant heads bad and doubtful separately loans and advances Loans and shall be separately stated advances due by directors or other officers of the company or any of them either severally or jointly with any other person or amounts due by firms or private companies respectively in which any director is a partner or a director or a member 26 CU IDOL SELF LEARNING MATERIAL (SLM)

19. Other current an all-inclusive which incorporates current assets that do not assets (specify heading fit into any other asset categories nature) 20. Contingent shall be classified 1) Claims against the company not liabilities (to as acknowledged as debt; the extent not provided for) shall be classified 2) Guarantees;3) Other money for which the commitments as company is contingently liable. (to the extent not provided 1) Estimated amount of contracts remaining for) to be executed on capital account and not provided for; 2) Uncalled liability on shares and other investments partly paid; 3) Other commitments (specify nature). SUMMARY The balance sheet is one of the three fundamental financial statements and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of financial position. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity. A balance sheet gives a statement of a business’s assets, liabilities and shareholders’ equity at a specific point in time. They offer a snapshot of what your business owns and what it owes as well as the amount invested by its owners, reported on a single day. A balance sheet tells you a business’s worth at a given time, so you can better understand its financial position. KEY WORDS • Account:A record that is kept for each asset, liability, equity, revenue, expense, and dividend component of an entityaccounting • Accounting:A set of concepts and techniques that are used to measure and report financial information about an economic unitbalance sheet 27 CU IDOL SELF LEARNING MATERIAL (SLM)

• Balance Sheet:A financial statement that presents a firm's assets, liabilities, and owners' equity at a particular point in timeconsolidation • Current assets:Assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer • Current liabilities:Obligations that will be liquidated within one year or the operating cycle, whichever is longer LEARNING ACTIVITY 1. Is it possible to have a balance sheet for a single day? 2. Why does a company's profit appear as a credit on its balance sheet? UNIT END QUESTIONS A. Descriptive Type Questions Short Questions 1. What is a balance sheet? Why is it prepared? 2. What are adjustment entries? Why are they passed? 3. Where is a contract with a customer reported on the balance sheet? 4. When a liability shall be classified as non-current? 5. When an asset shall be classified as current? Long Questions 6. H Ltd. engaged in the business of manufacturing lotus wine. The process of manufacturing this wine takes around 18 months. Due to this reason H Ltd. has prepared its financial statements considering its operating cycle as 18 months and accordingly classified the raw material purchased and held in stock for less than 18 months as current asset. Comment on the accuracy of the decision and the treatment of asset by H Ltd. As per Schedule III of Companies Act, 2013. 7. KAY Ltd. is in the process of finalizing its accounts for year ended 31st March,2014andfurnishes the following information: (i) Finished goods normally are held for 30 days before sale. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) Sales realization from Debtors usually takes 60 days from date of credit invoice. (iii) Raw materials are held in stock to cover one month’s production requirements. (iv) Packing materials, being specifically made for the company and having lead time of 90 days is held in stock for 90 days. (v) The holding period in respect of unfinished goods is 30 days. (vi) Being a monopoly KAY Ltd. enjoys a credit period of 12.5 months from its suppliers who sometimes at the end of their credit period opt for conversion of their dues into long term debt of KAY Ltd. You are required to compute the operating cycle of KAY Ltd. as per revised Schedule III of Companies Act, 1956. As the suppliers of the company are paid off after a credit period of 12.5 months should this be part of Current Liability? Would your answer be the same if the creditors are settled in 330 days? B. Multiple Choice Questions 1. On balance sheet, accruals, notes payables, and account payable are listed under which category? a) Current Liabilities b) Accumulated Liabilities c) Noncurrent Liabilities d) Accrued Liabilities 2. Inventories, cash and equivalents, and accounts receivables are listed as a) Earnings on Income Statement b) Payments on Income Statement c) Assets on the Balance Sheet d) Liabilities on the Balance Sheet 3. Salaries and wages employees are recorded in which accounts are called 29 a) Accruals Accounts b) Accrued Expenses c) Zero Liabilities d) Both A and B CU IDOL SELF LEARNING MATERIAL (SLM)

4. In the situation of bankruptcy, a stock which is recorded above common stock and below debt account is a) Preferred Stock b) Debt Liabilities c) Common Liabilities d) Hybrid Stock 5. A firm buys products but does not pay to suppliers instantly. This is recorded as a) Account Receivable b) Account Payable (c) Accumulated Liabilities (d) Current Liabilities 6. On balance sheet, accruals, notes payables, and account payable are listed under which category? (a) Current Liabilities (b) Accumulated Liabilities (c) Noncurrent Liabilities (d) Accrued Liabilities 7. Inventories, cash and equivalents, and accounts receivables are listed as (a) Earnings on Income Statement (b) Payments on Income Statement (c) Assets on the Balance Sheet (d) Liabilities on the Balance Sheet 8. In the situation of bankruptcy, a stock which is recorded above common stock and below debt account is 30 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) Preferred Stock (b) Debt Liabilities (c) Common Liabilities (d) Hybrid Stock 9. In a balance sheet, the total of common stock and retained earnings are examined as (a) Common Equity (b) Due Equity (c) Preferred Equity (d) Common Perpetuity 10. A firm buys products but does not pay to suppliers instantly. This is recorded as (a) Account Receivable (b) Account Payable (c) Accumulated Liabilities (d) Current Liabilities Answers 6. a 7.c 8. a 9. a 10. b 1. a 2. c 3. d 4. a 5. b REFERENCES • Monga, J.R. (2005). Financial Accounting: Concepts and Applications. New Delhi: Mayor Paper Backs. • Shukla, M.C., Grewal, T.S., and Gupta, S.C. (2007). Advanced Accounts. New Delhi: S. Chand & Co. • Hanif, M. &Mukherjee, A. (2015). Corporate Accounting. South West: Thomson. • Tulsian, P.C. (2014). Corporate Accounting. New Delhi: Tata McGraw-Hill Education. • Batra G.C., Modern trends in Accounting Research –New Horizons in Auditing and Contemporary Accounting, Deep and Deep Publication, New Delhi, 2007 Edition. • Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports 31 CU IDOL SELF LEARNING MATERIAL (SLM)

• Accounting Game: Basic Accounting Fresh from the Lemonade Stand UNIT-2 PROFIT & LOSS ACCOUNT Structure Learning Objective Introduction Preparation of Statement of Profit and Loss as per Schedule III of Companies Act, 2013. Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State about profit & loss account • Outline preparation of profit &loss statement as per Schedule III of Companies Act, 2013 INTRODUCTION The account that shows annual net profit or net loss of a business is called Profit and Loss Account. It is prepared to determine the net profit or net loss of a trader. P&L account is a component of final accounts. The profit and loss account shows what net profit and loss your business has made within an accounting period after deducting all expenditure from the income. A net profit is earned if the total expenditure is less than the sales and a net loss if it is greater. The profit & loss statement is considered one of the most important documents for keeping an eye on the financial health of a business. It is also sometimes referred to as the ‘income statement’. PREPARATION OF STATEMENT OF PROFIT AND LOSS AS PER SCHEDULE III OF COMPANIES ACT, 2013. STATEMENT OF PROFIT AND LOSS 32 CU IDOL SELF LEARNING MATERIAL (SLM)

Name of the Company……………………. Profit and loss statement for the year ended ……………………… (Rupees in ............... ) Particulars Note Figures as at the end of Figures as at the No. current reporting period end of the previous reporting period 1 23 4 I Revenue from operations xxx xxx II Other income xxx xxx III Total Revenue (I + II) xxx xxx IV Expenses: Xxx Xxx Cost of materials consumed Purchases of Stock-in-Trade Xxx Xxx Changes in inventories of Xxx Xxx finished goods work-in-progress and Stock-in-Trade Employee benefits expense xxx Xxx Finance costs Depreciation and amortization expense Other expenses 33 CU IDOL SELF LEARNING MATERIAL (SLM)

Total expenses V Profit before exceptional and xxx xxx extraordinary items and tax (III - IV) xxx xxx VI Exceptional items xxx xxx xxx VII Profit before extraordinary items xxx and tax (V - VI) Xxx Xxx VIII Extraordinary items xxx xxx xxx IX Profit before tax (VII- VIII) xxx xxx xxx X Tax expense: Xxx xxx (1) Current tax Xxx (2) Deferred tax Xxx xxx XI Profit (Loss) for the period from xxx continuing operations (VII-VIII) 34 XII Profit/(loss) from discontinuing xxx operations XIII Tax expense of discontinuing xxx operations XIV Profit/(loss) from Discontinuing xxx operations (after tax) (XII-XIII) XV Profit (Loss) for the period (XI + xxx XIV) XVI Earnings per equity share: Xxx (1) Basic xxx (2) Diluted See accompanying notes to the financial statements. CU IDOL SELF LEARNING MATERIAL (SLM)

GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OFPROFIT AND LOSS 1. The provisions of this Part shall apply to the income and expenditure accountreferred to in sub- clause (ii) of clause (40) of section 2 in like manner as they apply to a statement of profit and loss. 2. (A) In respect of a company other than a finance company revenue from operations shall disclose separately in the note’s revenue from— (a) Sale of products; (b) Sale of services; (c) Other operating revenues; Less: (d) Excise duty. (B) In respect of a finance company, revenue from operations shall include revenue from— (a) Interest; and (b) Other financial services. Revenue under each of the above heads shall be disclosed separately by way of notes to accounts to the extent applicable. 3. Finance Costs Finance costs shall be classified as: (a) Interest expense; (b) Other borrowing costs; (c) Applicable net gain/loss on foreign currency transactions and translation. 4. Other income Other income shall be classified as: (a) Interest Income (in case of a company other than a finance company); (b) Dividend Income; (c) Net gain/loss on sale of investments; (d) Other non-operating income (net of expenses directly attributable to such income). 5. Additional Information A Company shall disclose by way of notes additional information regarding aggregateexpenditure and income on the following items: — 35 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) (a) Employee Benefits Expense [showing separately (i) salaries and wages, (ii) contribution to provident and other funds, (iii) expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP), (iv) staff welfare expenses]. (b) Depreciation and amortisation expense; (c) Any item of income or expenditure which exceeds one per cent. of the revenue from operations or Rs.1,00,000, whichever is higher; (d) Interest Income; (e) Interest expense; (f) Dividend income; (g) Net gain/loss on sale of investments; (h) Adjustments to the carrying amount of investments; (i) Net gain or loss on foreign currency transaction and translation (other than considered as finance cost); (j) Payments to the auditor as (a) auditor; (b) for taxation matters; (c) for company law matters; (d) for management services; (e) for other services; and (f) for reimbursement of expenses; (k) In case of Companies covered under section 135, amount of expenditure incurred on corporate social responsibility activities; (l) Details of items of exceptional and extraordinary nature; (m) Prior period items; (ii) (a) In the case of manufacturing companies, — (1) Raw materials under broad heads. (2) Goods purchased under broad heads. (b) In the case of trading companies, purchases in respect of goods traded in by the company under broad heads. (c) In the case of companies rendering or supplying services, gross income derived from services rendered or supplied under broad heads. (d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if purchases, sales and consumption of raw material and the gross income from services rendered is shown under broad heads. (e) In the case of other companies, gross income derived under broad heads. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) In the case of all concerns having works in progress, works-in-progress under broad heads. (iv) (a) The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserve, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as to which the balance sheet is made up. (b) The aggregate, if material, of any amounts withdrawn from such reserves. (v) (a) The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments. (b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required. (vi) Expenditure incurred on each of the following items, separately for each item: — (a) Consumption of stores and spare parts; (b) Power and fuel; (c) Rent; (d) Repairs to buildings; (e) Repairs to machinery; (f) Insurance; (g) Rates and taxes, excluding, taxes on income; (h) Miscellaneous expenses, (vii) (a) Dividends from subsidiary companies. (b) Provisions for losses of subsidiary companies. (viii) The profit and loss account shall also contain by way of a note the following information, namely: — (a) Value of imports calculated on C.I.F basis by the company during the financial year in respect of— I. Raw materials; II. Components and spare parts; III. Capital goods; (b) Expenditure in foreign currency during the financial year on account of royalty, know-how, professional and consultation fees, interest, and other matters; (c) Total value if all imported raw materials, spare parts and components consumed during the financial year and the total value of all indigenous rawmaterials, spare parts and components similarly consumed and the percentageof each to the total consumption; 37 CU IDOL SELF LEARNING MATERIAL (SLM)

(d) The amount remitted during the year in foreign currencies on account of dividends with a specific mention of the total number of non-resident shareholders, the total number of shares held by them on which the dividends were due and the year to which the dividends related; (e) Earnings in foreign exchange classified under the following heads, namely: — I. Export of goods calculated on F.O.B. basis; II. Royalty, know-how, professional and consultation fees; III. Interest and dividend; IV. Other income, indicating the nature thereof. Note: — Broad heads shall be decided taking into account the concept of materiality and presentation of true and fair view of financial statements. SUMMARY An income statement or profit and loss account is one of the money related explanations of a company and appears the company's incomes and costs amid a specific period. It demonstrates how the incomes are changed into the net salary or net benefit. A profit and loss statement is a record of revenue and expenses incurred by a business in a given period of time. A profit and loss statement is also called a P&L, an income statement, a statement of profit and loss, an income and expense statement, or a statement of financial results. The P&L shows management and investors whether a company made a profit or lost money in the time period covered by the report. KEY WORDS • Debit: The nature of an action to an account to indicate an increase (assets, expenses, and dividends) or decrease (liabilities, equity, and revenue); usually left-justified in an entry • Credit: The nature of an action to an account to indicate an increase (liabilities, equity, and revenue) or decrease (assets, expenses, and dividends); usually right-justified in an entry • EBIT:An analyst's calculation to reflect \"earnings before interest and taxes\" • EBITDA:An analyst's calculation to reflect \"earnings before interest, taxes, depreciation, and amortization\" • Expenses: The costs incurred in producing revenues • Gross profit:A calculated amount corresponding to net sales minus cost of goods sold 38 CU IDOL SELF LEARNING MATERIAL (SLM)

LEARNING ACTIVITY 39 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT END QUESTIONS 40 A. Descriptive Type Questions Short Questions 1. What is a profit and loss statement (P&L)? 2. When do I need to prepare a profit and loss statement? 3. What information do I need to prepare this statement? Long Questions CU IDOL SELF LEARNING MATERIAL (SLM)

3. Following is the trial balance of PQR company on 31st March 2018: Particulars Amount Amount (Dr) (Cr) Opening stock 32000 Purchases 230000 Sales 370000 Return inwards 25000 Return outward 18000 Carriage inwards 8000 Carriage outwards 5000 41 CU IDOL SELF LEARNING MATERIAL (SLM)

Rent 36000 Discount allowed 4000 Salaries 48000 Plant and machinery 180000 Furniture 30000 Drawings 9000 Sundry debtors 120000 Sundry creditors Capital 175000 164000 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Cash at bank 25500 TOTAL 727000 727000 Additional information: 43 Value of the Closing stock is Rs. 63000. Bad debts of Rs. 5000 Rent received Rs. 6000 Depreciation on: Plant and machinery @10% and furniture @5% Prepare profit and loss account for the year ended 31st March 2018. B. Multiple Choice Questions 1. The unfavourable balance of Profit and Loss account should be a) Subtracted from liabilities b) Subtracted from capital c) Subtracted from current assets d) Added in liabilities 2. What kind of expenses are paid from Gross Profit? a) Selling Expenses b) Financial Expenses CU IDOL SELF LEARNING MATERIAL (SLM)

c) General Expenses d) All of these 3. P&L statement is also known as a) Statement of operations b) Statement of income c) Statement of earnings d) All of these 4. The term ‘Financial Statement’ covers a) Profit & Loss Statement b) Balance sheet and Profit & Loss Statement appropriation account c) Profit & Loss Statement and Balance sheet d) All of above are false 5. The main operation expenses of a business are termed as a) Operating expenses b) Non-administration expense c) Selling expenses d) Administration expense 6. Statements prepared to know profit or loss and financial position of the business are called: a) Financial Statement b) Bank Reconciliation Statement c) Trial Balance d) All of these 7.Account which shows Gross Profit or Gross Loss of the business is called: a) Profit and Loss Account b) Balance Sheet c) Trial Balance d) Trading Account 44 CU IDOL SELF LEARNING MATERIAL (SLM)

8.Trading Account is prepared to know: a) Net Profit or Loss of business b) Gross Profit or Loss of business c) Both (1) or (2) d) Financial Position of business 9. Profit and Loss Account shows the: a) Total Capital Employed b) Profit and Loss through sale of assets c) Profit earned by business d) None of these 10. Profit and Loss Account is prepared: a) At a particular point of time b) On fixed date c) For a certain period d) All of these Answers 1. b 2. d 3. b 4. c 5. a 6. a 7. d 8. b 9. c 10. c REFERENCES • Maheshwari, S.N., and Maheshwari, S. K. (2002). Financial Accounting. New Delhi: Vikas Publishing House. • Lal, Jawahar. & Srivastava, Seema. (2009). Financial Accounting Text &Problems. Mumbai: Himalaya Publishing House. • Batra G.C., Modern trends in Accounting Research –New Horizons in Auditing and Contemporary Accounting, Deep and Deep Publication, New Delhi, 2007 Edition. • Prof.Jawahar Lal., Corporate Financial Reporting Theory and Practices, Taxman’s, 2003 Edition • Accounting for the Number phobic: A Survival Guide for Small Business Owners • Accounting Made Simple: Accounting Explained in 100 Pages or Less 45 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-3 FINANCIAL STATEMENTS Structure Learning Objective Introduction Preparation of Comparative and Common Size Financial Statements. Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • Describe comparative Financial Statement • Discuss common size financial statement • Outline format of Comparative financial statement • Explain format of common size financial statement INTRODUCTION The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows. PREPARATION OF COMPARATIVE AND COMMON SIZE FINANCIAL STATEMENTS Meaning of Comparative Statements: The comparative financial statements are statements of the financial position at different periods; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in a comparative form will be covered in comparative statements. From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purposes. Not only the comparison 46 CU IDOL SELF LEARNING MATERIAL (SLM)

of the figures of two periods but also be relationship between balance sheet and income statement enables an in depth study of financial position and operative results. The comparative statement may show: (i) Absolute figures (rupee amounts). (ii) Changes in absolute figures i.e., increase or decrease in absolute figures. (iii) Absolute data in terms of percentages. (iv) Increase or decrease in terms of percentages. The analyst is able to draw useful conclusions when figures are given in a comparative position. The figures of sales for a quarter, half -year or one year may tell only the present position of sales efforts. When sales figures of previous periods are given along with the figures of current periods then the analyst will be able to study the trends of sales over different periods of time. Similarly, comparative figures will indicate the trend and direction of financial position and operating results. The financial data will be comparative only when same accounting principles are used in preparing these statements. In case of any deviation in the use of accounting principles this fact must be mentioned at the foot of financial statements and the analyst should be careful in using these statements. Types of Comparative Statements: The two comparative statements are (i) Balance sheet, and (ii) Income statement. (i) Comparative Balance Sheet: The comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates.’ The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and these changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increases in figures. The fourth column may be added for giving percentages of increases or decreases. 47 CU IDOL SELF LEARNING MATERIAL (SLM)

Guidelines for Interpretation of Comparative Balance Sheet: While interpreting Comparative Balance Sheet the interpreter is expected to study the following aspects: (1) Current financial position and liquidity position. (2) Long -term financial position. (3) Profitability of the concern. (1) For studying current financial position or short -term financial position of a concern, one should see the working capital in both the years. The excess of current assets over current liabilities will give the figures of working capital. The increase in working capital will mean improvement in the current financial position of the business. An increase in current assets is accompanied by the increase in current liabilities of the same amount will not show any improvement in the short-term financial position. A student should study the increase or decrease in current assets and current liabilities and this will enable him to analyse the current financial position. The second aspect which should be studied in current financial position is the liquidity position of the concern. If liquid assets like cash in hand, cash at bank, bills receivables, debtors, etc. show an increase in the second year over the first year, this will improve the liquidity position of the concern. The increase in inventory can be on account of accumulation of stocks for want of customers, decrease in demand or inadequate sales promotion efforts. An increase in inventory may increase working capital of the business but it will not be good for the business. (2) The long -term financial position of the concern can be analysed by studying the changes in fixed assets, long-term liabilities and capital. The proper financial policy of concern will be to finance fixed assets by the issue of either long-term securities such as debentures, bonds, loans from financial institutions or issue of fresh share capital. An increase in fixed assets should be compared to the increase in long-term loans and capital. If the increase in fixed assets is more than the increase in long term securities then part of fixed assets has been financed from the working capital. On the other hand, if the increase in long-term securities is more than the increase in fixed assets then fixed assets have not only been financed from long-term sources but part of working capital has also been financed from long-term sources. A wise policy will be to finance fixed assets by raising long-term funds. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

The nature of assets which have increased or decreased should also be studied to form an opinion about the future production possibilities. The increase in plant and machinery will increase production capacity of the concern. On the liabilities side, the increase in loaned funds will mean an increase in interest liability whereas an increase in share capital will not increase any liability for paying interest. An opinion about the long-term financial position should be formed after taking into consideration above-mentioned aspects. (3) The next aspect to be studied in a comparative balance sheet question is the profitability of the concern. The study of increase or decrease in retained earnings, various resources and surpluses, etc. will enable the interpreter to see whether the profitability has improved or not. An increase in the balance of Profit and Loss Account and other resources created from profits will mean an increase in profitability to the concern. The decrease in such accounts may mean issue of dividend, issue of bonus shares or deterioration in profitability of the concern. (4) After studying various assets and liabilities an opinion should be formed about the financial position of the concern. One cannot say if short-term financial position is good then long-term financial position will also be good or vice-versa. A concluding word about the overall financial position must be given at the end. Format of Comparative Income Statement Illustration 1: 49 CU IDOL SELF LEARNING MATERIAL (SLM)

From the following information prepare a comparative income statement showing increase, decrease and percentage: Illustration 2: From the following data, prepare a statement of Profit in Comparative from: 50 CU IDOL SELF LEARNING MATERIAL (SLM)